## A New Social Contract (Nemat Shafik)

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**Canonical URL:** [A New Social Contract (Nemat Shafik)](https://www.imf.org/-/media/files/publications/fandd/article/2018/december/lse-a-new-social-contract-shafik.pdf)

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### Diagnosis: causes of insecurity and political backlash
- Increasing repudiation of liberal democracy, liberal economies, and a rules-based international system despite past progress.
- Drivers of public discontent:
  - Slowing economic progress, flatlining productivity and social mobility, demographic and technological shifts.
  - Inequality: global between-country inequality fell but within-country distribution diverged—middle class in emerging markets and the richest 1 percent globally benefited, while the middle class in advanced economies suffered.
  - High costs of education and housing, low-quality jobs with poor benefits.
- Empirical findings cited:
  - A McKinsey Global Institute study of 25 advanced economies found that 65 to 70 percent of households (or 540 million to 580 million people) experienced flat or falling incomes before taxes and transfers from 2005 to 2014.
  - Fiscal policy reduced this decline to 20 to 25 percent in terms of disposable incomes according to the 2016 McKinsey study “Poorer Than Their Parents? Flat or Falling Incomes in Advanced Economies.”
  - In the United States, a 4 percent drop in market incomes became a 1 percent gain in disposable incomes over time, aided by the Obama administration’s stimulus that transferred more than $350 billion to households.
  - In France, the safety net raised median disposable income by 3 percentage points above median market income; in the United Kingdom, transfers fully offset the decline in market incomes.
  - The US Bureau of Labor Statistics prediction: for every highly paid job in software development, there will be six new low-paid jobs for personal care and home health aides between 2014 and 2024.
  - Political correlations: Delsman (forthcoming) finds 21 of the 22 states where jobs were most vulnerable to automation voted for Donald Trump in 2016; all 15 least vulnerable states backed Hillary Clinton.
  - Ebbinghaus and Naumann (2018): as the age of the median voter rises by a year, public spending on pensions goes up by 0.5 percent of GDP.

### Mechanisms that have weakened the social contract
- Hyper-globalization and post-crisis austerity frayed reciprocal elements of citizenship (rights and obligations).
- Automation and global competition depressed wages for less skilled workers and increased precarious work with minimal benefits.
- The financial crisis and the debt accumulated in its aftermath led to welfare cuts, which increased social grievances and feelings of abandonment and loss of dignity.
- Declining spending on worker education and training across most countries, combined with weaker firm incentives to train when turnover is high.

### Core policy proposals and principles for a revised social contract
- Re-emphasize reciprocity and insurance in welfare provision to counter perceptions of “hard-working people” versus “welfare scroungers”; evidence (John Hills, LSE) shows most people take out roughly as much as they put in over their lives.
- Consider political and social advantages of universal benefits to secure broad buy-in and ensure quality; universal social insurance was the original intent of the UK welfare state founder William Beveridge.
- Pre-distribution policies (medium term) to address inequality:
  - Invest in education and equalizing education opportunities and outcomes.
  - Boost social mobility and infrastructure investment in poorer regions.
  - Spread productivity improvements to the frontier to match people to the right jobs.
  - Support “Lost Einsteins” thesis: providing opportunity to disadvantaged potential innovators.
- Near-term redistribution to address rising inequality:
  - Reverse trends that made tax systems less progressive (lower corporate taxes and top personal income rates; higher value-added taxes).
  - Explore taxing wealth (inheritance, land, real estate) given wealth has become more unequal than income.
  - IMF research cited: greater equality boosts growth (Ostry, Berg, and Tsangarides 2014).
- Income floor and labor-market measures:
  - Floor incomes via wage subsidies, earned income tax credits, and higher minimum wages, plus access to education and healthcare.
  - Shun universal basic income in most middle-income and advanced economies as expensive and inferior to a functioning welfare state; consider UBI only in poor countries lacking capacity to manage a welfare state or where it would substitute for worse policies.
- Labor market and firm-level reforms for “flexibility with security”:
  - Adopt models like “flexicurity”: firms retain flexibility to hire and fire but provide generous unemployment benefits, training, and job placement; firms pay higher taxes and engage with social partners on skill needs.
  - Increase investment in training and transitional support; extend rights to part-time and temporary workers (pensions, paid leave, training) as in Denmark, Germany, and the Netherlands.
- Adjustments for longer working lives and lifelong learning:
  - Abolish mandatory retirement ages and remove age limits for student loan eligibility.
  - Link pension eligibility to life expectancy (example: the Netherlands).
- Address the global labor-to-capital income shift:
  - Remove policies that tax labor more heavily where possible.
  - Pursue international efforts to ensure capital is taxed where economic activity takes place rather than in offshore havens and “tax efficient” structures to restore a sense of fairness.

### Expected benefits and rationale
- Restoring a refurbished social contract would:
  - Provide citizens with a greater sense of security and confidence amid demographic and technological change.
  - Sustain political support for open economies and societies.
  - Enhance growth by increasing social mobility and matching people to appropriate jobs.
  - Use productivity gains from automation to eliminate routine tasks, increase meaningful work and leisure, and share benefits broadly.

*Source: Nemat Shafik, “A New Social Contract,” Finance & Development, December 2018.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/december/lse-a-new-social-contract-shafik.pdf_